SAN FRANCISCO – A combination of higher interest rates and years of rising prices could soon take some air out of the hot U.S. housing market.

"The boom is showing some signs of tiring," said David Lereah, chief economist with the National Association of Realtors. "We are looking at about a 4 percent drop in home sales next year.

"We are projecting a significant drop in the price appreciation pace," Lereah said. But even though the velocity of the housing market will subside, "we are looking for a soft landing," he said.

Economic forecasts have been mixed in recent months, but Lereah is the latest high-profile housing-sector economist to project a drop in the housing market.

David Seiders, chief economist of the National Association of Home Builders, said recently that the housing market is "topping out."

The Realtors association is forecasting that home appreciation will slow from a nationwide average of more than 12 percent this year to only about 5 percent in 2005. In hot markets, the falloff could be more pronounced, Lereah said.

"Some markets are more susceptible to interest rate risks and shock," he said. "I cannot guarantee that there will be no hard landings."

Cities including Las Vegas; Orlando, Fla.; Phoenix and Washington, D.C., are on the Realtors' list of areas that have seen the biggest home price increases in the last three years. Markets like Dallas; Detroit; Austin, Texas; Houston and Denver have remained cool.

"The country is really unbalanced when it comes to the price of a home," Lereah said. "The boom has really discriminated across America."

Many cities are already transitioning from a sellers' market to a buyers' market. And the time it takes to sell a house is increasing in many cities.

"Eventually that seller will have to revise his expectations downward," Lereah said. "Instead of getting 20 percent appreciation in their home, they will have to get 5 percent."

Even with the forecast decline in sales next year, housing activity remains at a very high level. And Lereah said the market is fundamentally sound.

"In the real estate market, there is no hard evidence we have bubbles waiting to burst," he said.

But higher interest rates alone will cause a softening in home sales, economists agree.

"Mortgage rates are going up, but they will still be below 7 percent," Lereah said.

While still low by historic standards, he said that mortgage rates approaching 7 percent "could be more troublesome" for some areas of the country.

The increased use of adjustable-rate mortgages and so-called "exotic" home loans has made some homeowners more vulnerable to higher interest rates. Adjustable-rate loans make up about 30 percent of the mortgage market, Lereah said.

"The biggest risk I see right now in California and other parts of the U.S. is the element of risk introduced by adjustable-rate mortgages and interest-only loans and negative amortization loans," he said.

"When it comes to these exotic loans – even though it may slow home sales a bit – I'd like to see stricter guidelines so we can slow housing a bit so we can have a soft landing."

Lereah said among the real threats to the continued health of the housing market are proposals in Washington, D.C. to cut tax deductions for home mortgage interest and property taxes.

"In my opinion it's terrible timing – it's almost irresponsible," he said. "That would do severe damage to a lot of the local markets across the nation.

"We are looking at probably a 10 percent to 15 percent drop in home prices" if the proposals become reality, Lereah said.